You have a trust fund that will pay $1 million exactly ten years from today. You

Question

You have a trust fund that will pay $1 million exactly ten years from today. You want cash now, so you are considering an opportunity to sell the right to the trust fund to an investor.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

a. What is the least you will sell your claim for if you could earn the following rates of return on similar risk investments during the ten-year period?

a. 6%

b. 9%

c. 12%

b. Rework part (A) under the assumption that the $1 million payment will be received in fifteen rather than ten years.

c. Based on your findings in parts (a) and (b), discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of future sum.

Explanation / Answer

A) a.@6% : i will sell my claim at $558394.78 minimum. b.@9% : i will sell my claim at $422410.81 minimum. c. @12% : i will sell my claim at $321973.24 minimum. B) a. $417265.06 b.$274539.04 c.$182696.23 C) As the rate of rate of return increases keeping time until receipt same , the present value of the future sum decreases. As the time until receipt increases keeping rate of return same, the present value of future sum decreases.

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